Community banks are fighting to retain the heart of their business - the checking account - as bigger competitors win customers with the ultimate marketing tool, the word "free."

The two banking companies with the broadest geographic reach, Bank of America Corp. and Washington Mutual Inc., have launched aggressive campaigns to court depositors, offering no-fee checking with no minimum balance in all their markets.

Some community bankers have refused to follow suit, arguing that free checking is just as likely to reduce profits as it is to boost deposits. But others have started offering it or simply added perks to checking.

Ken Krueger, senior vice president for retail banking at $3.1 billion-asset Coastal Bancorp in Houston, said Coastal is facing fierce competition from both Bank of America and Washington Mutual. Its deposits dropped about 1% in the second quarter, to $1.69 billion.

Free checking does bring in new customers, Mr. Krueger said, but he questioned how many would ultimately prove profitable. Coastal reserves free accounts for those whose combined balances exceed $2,500 - customers, he said, who are much more apt than freebie-generated customers to maintain substantial checking account balances and keep a large chunk of their savings in the bank. It also offers would-be customers free airfare to Hawaii and nine other destinations.

"That's our strategy and we're sticking with it, even though our branch managers are all crying out for free checking," he said.

Advance Bank in Lansing, Ill., took a different path after Bank One Corp., Bank of Montreal's Harris Bank, and Fifth Third Bancorp made free-checking blitzes.

Advance, which has assets of $599 million, offered no-fee checking to customers who maintained a $2,500 monthly balance or took out a mortgage with the company. But instead of sweetening that pitch with a premium, it offered free checking to its business customers' employees.

"We wanted to be able to respond affirmatively to businesses and customers that we have a fee-free product," said James A. Fitch 2nd, the bank's chief executive officer. He said Advance had been weighing this for some time and finally pulled the trigger when the large banks started offering free checking.

Many of those banks have notched some impressive gains. In the Midwest, for instance, Fifth Third used unlimited free checking to attract 110,000 new accounts with deposits totaling $125 million between April 16 and July 20 alone.

Still, totally free checking accounts are relatively rare. Federal Reserve Board data show that 92% of the 1,050 banks and thrifts responding to a 2000 survey either required a minimum balance for free checking or charged a flat fee. The average minimum balance was $515 and the average fee was $8.30 a month.

Jennifer Demba, an analyst at Robinson Humphrey LLC in Atlanta, said community banks that offer good customer service may not need to worry about the big banks stealing their customers. "Community banks sell service and the personal touch," she said. "What we've seen so far is that customers are willing to pay the higher fee for the service."

James V. DeRentis, senior vice president for retail banking at $800 million-asset Bank Rhode Island in Providence, agreed.

Mr. DeRentis said Bank Rhode Island has no plans to offer free checking, even though one of his big-bank competitors, $35 billion-asset Sovereign Bank, introduced it in January. "Our focus in the five years we've been in business is relationship-based," he said.

Instead of offering free checking, Bank Rhode Island has concentrated on the traditional community banking model of meeting customers' financial needs, from checking to loans to commercial accounts. "Since Sovereign has introduced that program, we haven't lost any deposits," Mr. DeRentis said.

Jim G. Graham, president and chief executive officer of Waccamaw Bank in Whiteville, N.C., said competitive pricing allowed $124 million-asset Waccamaw to get new accounts and keep old ones without promising free checking

"I can only imagine the amount of resources they are putting into that," Mr. Graham said of free-checking campaigns. "We price our products competitively and are able to compete quite effectively."

Waccamaw counters its primary big-bank rival, Charlotte, N.C.-based Bank of America, by offering a flat fee account that charges customers $5 a month and lets them grow into free checking as their balances get larger.

Still, for community banks, any decisions involving retail checking are crucial. That's because checking accounts are not free for banks to maintain. Thus, big banks with more sources of noninterest income are typically in a better position to offer free services.

Southwest Bank of Texas in Houston is among the community banks offering totally free checking, and it began a major marketing campaign this year. Paul Murphy, $3.9 billion-asset Southwest's president and chief executive officer, said the product is so potent because all customers - even wealthy ones - like to get something for nothing.

"Right after we started offering free checking, one of the branch managers called and said they'd just opened a $400,000 account, and when I saw the [depositor's] name, I realized he was a pretty big shareholder in the bank," Mr. Murphy said. "So I called him up and told him he'd been holding out on us and asked him what made him decide to put his money in the bank.

"He told me, 'It was the free checking.' "

But even community bankers that have always had free checking say it is just the first step.

At $1.75 billion-asset Woodforest National Bank in Woodforest, Tex., a Houston suburb, customers get free checking accounts if their paychecks are directly deposited. "Really the reason you're offering [free checking] is you're holding out the carrot to get them in the door," said M. Ann Thomas, the bank's president. "When you get them in the door you have the audience to sell them insurance, loans, and other things."

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